<< I was searching for some information on AF and found this in the last year’s posts. Copied and being posted for all of us to remember. Please keep adding to this info. >> Calculate the FUTURE VALUE of the interest rate option call premium when calculating effective interest Make sure you consider time horizon when calculating breakeven spread Remember the correlation between EMC currency returns and stock returns is positive In terms of security selection: for micro attribution, use benchmark weights for security selection, use active weights for allocation/selection interaction. For global portfolio attribution, skip that step alltogether and just use portfolio weights In terms of market/sector allocation: for micro attribution, use (benchmark sector return - total benchmark reutrn). For global portfolio, just use benchmark sector/market return Remember the multiplier in CPPI when readjusting the portfolio Remeber Roy’s safety first uses standard deviation, sortino uses downside deviation For utility-adjusted return, use 0.5 when using percentages, 0.005 when not. Look for duration of cash and yield beta! Total Firm assets in GIPS include non-discretionary assets. For contingent immunization, don’t forget to decrease the “n” if they state that rates will change next year. Null Hypothesis: Manage does not add value Alt. Hypothesis: Manger adds positive value Type I Error: Rejecting the Null hypothesis when it is actually true - Keeping a manager that does not add value Type II Error: Failing to reject the Null hypothesis when it is actually false - Firing a good manager that is adding value Include inflation BEFORE adjusting an after-tax return to a pre-tax return Accrual accounting for dividends in GIPS: Recommendation -not Requirement SRIs have a bias towards growth and small-cap stocks cash and carry = short future, long spot (discounted at lease rate) and borrow money fed model = EY vs. treasury yield (10 year) constant mix is concave… i think of nightclub “the cave has great mix” Utility adjusted return: use VARIANCE and not standard deviation Grinold and Kroner : - if real growth, use “g + i” - if nominal growth, use “g” i.e. without inflation already included in g. Return presentation: - Ethics: gross OR net of management fees - Code: BOTH gross and net (together with fee schedule, projection of fees…) - GIPS: gross OR net of management fees Risk free rate to calculate the FV of the premium is the LIBOR plus any bp - i.e. the actual borrowing rate Cash duration = not always 0.25 PE and RE - benchmark is not a requirement 3 scenarios under which market value of commodity swap changes , 3 scenarios - rate changes, forward prices change and overpayment/underpayment (value to one party in either case) Retain your records for the higher of the legal minimum and whatever CFA code/standards you’re concerned with: …SIX years under the asset management code of conduct …SEVEN years under the CFA Standards.
COURTESY : DWIGHT (from his post last year) If our Human Capital is Bond-like, we should invest more aggressively (equity) and our demand for life insurance increases. A short position in an option is either out-of-the-money and no payment is due, or it is in-the-money and the short owes payment to the long. Therefore the short position bears NO CREDIT RISK. Honour willingness as long as it is below or equal to ability – except for the wealthy independent! Additional compensation arrangement requires both clients and employer give the written approval. Box Spread: combo of a Bull Call and Bear Put Spread; a non-directional strategy. . . seeks to exploit arbitrage opportunities between options prices of the same underlying. Taylor Rule: gives an estimate for central bank interest rate decisions: R target = R Neutral + 0.5*(GDP expected - GDP trend) + 0.5*(Inflation expected - Inflation target) When distinguishing between Type I and Type II errors, remember “Type I HORN.” Type I HO (Null Hypothesis) RN (Reject Null) Null = Manager adds no value; Reject and conclude that manager adds value when he actually does not. SAMURAI (For properties of a valid benchmark): Specified in advance, Appropriate, Measurable, Unambiguous, Reflective of manager’s current opinions, Accountable (Manager), Investable. Types of benchmarks - MBS FRAC! Manager Universe - Broad Mrkt indices - Style indices Factor model - Returns based - Absoute - Custom If only defense - lack of action or inaction Ceteris paribus - because of unexpected action/event, all else same Legal / Regulatory Constraints for Endowments and Foundations: UMIFA and Prudent Investor ERISA prohibits investment of more than 10% of DB plan assets in the company stock, but NO such law applies to DC plans Durations: Dfixed-Dfloating>0. To shorten duration take floating Asset (i.e. receive floating and pay fixed) Claw back provision: If PE sponsor received early distribution but failed to deliver the expected profit; he has to give back money. Private equity has low liquidity and allocation to this class should be 5% or less with a plan to keep the money invested for 7-10 yrs Adding REITs to stock / bond --> higher return --> marginally lower sd --> higher sharpe ratio Adding direct real estate investment to stock / bond --> lower return --> significantly lower sd --> higher sharpe ratio Going long a pay-fixed swap will lower your portfolio duration, while going long a pay-floating swap will increase your portfolio duration. For a domestic investor, currency risk is about half the risk of foreign stocks and about twice the risk of foreign bonds. There are four main reasons not to trade bonds - “please stop bothering susan” please = Portfolio constraints (biggest cause of inefficiency in bond markets) stop = story disagreements bothering = buy and hold susan = seasonality There are eight main reasons to trade bonds - “really can cook, no salt you say?” really = relative value pick up (biggest reason) can = credit upside cook = credit defence no = new issue trades salt = secot-rotation trades you = yield curve pickups say? = structure trades Distressed Debt Arbitrage = long debt and short equity of the same company. Total Active Return = True active return + Misfit active return true = Manager return - Normal port return misfit = Normal port return - Benchmark Increase in Age -> Lower demand for life insurance Higher risk aversion -> Higher demand for life insurance Greater initial wealth -> Lower demand for life insurance Stronger Bequest Motive -> Higher demand for life insurance Stock-based compensation and bonuses: Complements Explicit Incentives and Implicit Incentives: Substitutes In a non-trending market, Constant Mix outperforms Buy-and-Hold outperforms CPPI In a trending market, CPPI outperforms Buy-and-Hold outperforms Constant Mix Investor’s Utility Adjusted Return = Expected Return Portfolio - 0.005 * Risk Aversion Score * Portfolio Variance “(Insert name of firm) has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®).” Total commodity return = collateral return + roll return + spot return *For roll return it is the futures differential minus the spot return Without rebalancing, classical immunization only works for a 1-time instaneneous change in i-rates. We cease to be immunized when (1) i-rates change and (2) Time passes Currency Management Strategies: Balanced Mandate - Asset Manager also manages currency Currency Overlay - Currency managed within IPS by another currency manager Seperate Asset Class - Currency managed under its own seperate guidelines (Note - CFAI says it’s a suboptimal strategy if managed in two-steps. Simultaneous management would be better.) For Grinold/Kroener: always look for real or nominal g! - real should be used, as inflation is a separate component; thus, do not sum nominal g and i Beta of A = standard deviation of A / standard deviation of market * correlation Covariance of A and B = Beta of A * beta of B * square of standard devation of market Jensen’s Alpha: Portfolio Return - Expected Portfolio Return based on SML IR: Active Return / Standard Deviation of Active Returns * Note: IR doesn’t capture all portfolio variability, just the variability of excess returns * Sharpe: (Return Portfolio - Rf) / (Standard Deviation Portfolio) Treynor: (Return Portfolio - Rf) / Beta Portfolio M2: Rf + Sharpe * Standard Deviation Market Implication of cyclical and secular changes in the corporate bond market include: 1. securities with embedded options will command a premium due to their scarcity 2. the percentage of long-term issues will decline - effective duration and aggregate interest rate risk sensitivity will also decline. Moral Hazard Problems (Corporate Governance): a) Insufficent effort results when company execs are too occupied with various non work related interests (i.e. golf game, buying expensive art, etc.) instead of focusing and putting enough effort to get the job done b) Exravagant projects is when management continue to invest in high profile or pet projects even though the return on the investments is not in the best interest of the company and its shareholders c) Entrechement – when managers invest in bad projects but in projects where they have a strong understanding so that they become more valuable to the company d) Self-Dealing – I am not 100% sure, but I think when they funel business to companies they own or family and friends. Corridor Widths Factor…(Value - effect on corridor widths) Transaction Costs…(higher-higher) Risk tolerance…(higher-higher) Correlation…(higher-higher) Volatility…(higher-lower) Volatility of the rest of the portfolio…(higher-lower) A contango commodity market occurs when the lease rate is less than the risk free rate. Cross Default Provision: issue considered in default if defaulted on another credit agreements Jump to Default: AKA current credit risk Grinold and Kroner: R(i) = Div1/P0 + i + g - (DELTA) S + (DELTA) P/E Ri = expected return on stock i Div1 = dividend next period P0 = current stock price i = expected inflation rate g = real growth rate in total earnings (DELTA) S = change in shares outstanding (DELTA) P/E = change in P/E ratio Market Neutral Strategy has a Beta of Zero. Manager can add Beta exposure using futures, swaps, etc. Short Extension Strategy: Net Portfolio beta=Beta Long+Beta Short, hence can outperform long only strategy as it exploits benefits of short-selling Payer’s Swaption–gives the buyer of the option the right to enter into a swap where the option buyer pays the fixed rate . Converts a future FRN into fixed rate obligation. Receiver’s Swaption–gives the buyer of the option the right to enter into a swap where the option buyer receives the fixed rate. Converts a future fixed rate obligation into floating rate obligation.
hey guys, thanks for this very useful thread! could you please help on this? I put my questions below each note. Thanks!! M. For contingent immunization, don’t forget to decrease the “n” if they state that rates will change next year. >> what is “n”? fed model = EY vs. treasury yield (10 year) >> don’t remember it… Return presentation: - Ethics: gross OR net of management fees - Code: BOTH gross and net (together with fee schedule, projection of fees…) - GIPS: gross OR net of management fees Cash duration = not always 0.25 >> thought it is always = 0.25… when can it differ from 0.25? Honour willingness as long as it is below or equal to ability – except for the wealthy independent! >> thorught we should honour the lower, either ability or willigness… didn’t know there was something special for wealthy guys… being “wealthy” remains subjective, though… ERISA prohibits investment of more than 10% of DB plan assets in the company stock, but NO such law applies to DC plans >> thanks! didn’t know that
malek_bg Wrote: ------------------------------------------------------- > hey guys, > > thanks for this very useful thread! > > could you please help on this? I put my questions > below each note. > Thanks!! > M. > > For contingent immunization, don’t forget to > decrease the “n” if they state that rates will > change next year. > >> what is “n”? > > fed model = EY vs. treasury yield (10 year) > >> don’t remember it… > > > Return presentation: > - Ethics: gross OR net of management fees > - Code: BOTH gross and net (together with fee > schedule, projection of fees…) > - GIPS: gross OR net of management fees > > > Cash duration = not always 0.25 > >> thought it is always = 0.25… when can it > differ from 0.25? > > > Honour willingness as long as it is below or equal > to ability – except for the wealthy independent! > > >> thorught we should honour the lower, either > ability or willigness… didn’t know there was > something special for wealthy guys… being > “wealthy” remains subjective, though… > > > ERISA prohibits investment of more than 10% of DB > plan assets in the company stock, but NO such law > applies to DC plans > >> thanks! didn’t know that Any input? thanks! M.